Australia's Biggest Rate Hike In 22 Years Sends Aussie Up For Just A Minute

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by Tyler Durden
Tuesday, Jun 07, 2022 - 02:40 PM

By Garfield Reynolds, Bloomberg Markets Live commentator and reporter

The RBA joined the uber-hawkish bandwagon on Tuesday when it hiked rates by 50bps to 0.85% (exp. 25bps increase) its first half-point interest-rate hike since 2000, and said inflation in Australia has increased significantly, while it is committed to doing what is necessary to ensure that inflation in Australia returns to the target over time.

RBA added that inflation is likely to be higher than was expected a month ago and the Board expects to take further steps in normalising monetary conditions over the months ahead with the size and timing of future interest rate increases to be guided by the incoming data and the assessment of the outlook for inflation and the labor market. Furthermore, it noted the Australian Economy is resilient although one source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households' budgets from higher inflation.

As Bloomberg's Garfield Reynolds notes, Australia’s dollar rose for about a minute after the central bank stunned traders with the first 50bps rate hike since 2020. But it quickly tumbled back down as traders added former uber-dove RBA to the ranks of global policy makers ready to stymie growth in order to tame inflation.

The gap between 10- and three-year government yields underscored such concerns by shrinking as much as 13bps, the biggest RBA day move in at least a year.

Governor Philip Lowe’s comments that policy makers are “committed to doing what is necessary to ensure that inflation” is brought within the target can be taken to mean plenty more hikes are coming and that longer-end bonds are likely to outperform the short end for some time to come.

The RBA looked past nascent signs that declining home prices and soaring power costs are hammering consumer confidence to focus purely on taming inflation when it decided to raise the cash rate target to 0.85% from 0.35%. The Aussie dollar rose as much as 0.7% straight after the hike but is now down about 0.2% amid speculation RBA front-loading will result in a lower terminal rate.